Won’t somebody please think of the children? The ‘kidtech’ space is about to explode, led by European startups

Dylan Collins is one of Europe’s most experienced digital media entrepreneurs, focusing on games, kids entertainment and the technology which underpins them.
He is currently CEO of SuperAwesome and VC at HoxtonVentures.

Updated

And think about it: Europe has been responsible for a disproportionately large number of kids startups in the past (Rovio, Outfit7, Zepto Labs, Mind Candy and so on) – almost all of which were content-based.

And yet, despite the kids audience driving some of the largest entertainment revenue on the planet (e.g. Frozen), the digital kids space is surprisingly under-developed. Although there’s been quite a bit of VC investment into kids content (Mind Candy, Stardoll), there has been significantly less in platform and tools companies.

Partially, this has been due to quirks of VC behaviour: many professional investors are reluctant to inject capital into sectors where there hasn’t been a history of exits. The lack of direct experience with these apps and services – most VCs are not children – has also been a factor in evaluating opportunities.

This is about to change. There is a new generation of kids startups focused on platform, tools and adtech fuelled by a broader structural shift in the sector. Occasionally referred to as ‘kidtech’, they are tackling opportunities in the kids market that are worth billions of dollars in the adult sector.

An unusual disruptor: government legislation

Over the last 2-3 years, the entire digital kids market has been reshaped by kids data privacy legislation led by the US (but being rapidly followed by the EU). The latest version of the Children’s Online Privacy and Protection Act (COPPA) prohibits behavioural online advertising – the proverbial backbone of the mainstream online ad market – almost entirely.

This isn’t mere posturing; in the US, the FTC have handed out millions of dollars in COPPA fines to companies such as Yelp and Path, while others like Marvel, Topps etc. have been singled out for investigation by lobby groups. To wit, the EU is likely to follow the COPPA standard fast with an equivalent due in 2016 as part of the Data Protection Directive.

Going one step further, the EU plans to fine companies up to 5% of revenue for infractions. The writing is clearly on the wall. Companies like LEGO, Mars and others have already adopted COPPA as a global standard with many more contemplating similar strategies.

This doesn’t just impact adtech; there are restrictions on user registration, CRM and major challenges for user experience. In effect, an entirely new layer of kid-compliant technology is now required. This new set of standards is enormously disruptive for existing companies and is one of those rare windows which presents a huge advantage to new entrants.

There is a wall of money waiting for the companies that get this right.

At the same time, Internet giants are finally waking up to kids

An on/off topic in boardrooms for the last couple of years, it’s becoming clear that the major Internet companies are by now taking the kids market seriously. Google appears to be furthest ahead of the pack with their strategy that includes YouTube Kids (which was announced at Kidscreen Summit this week) and a more general kids offering the company spoke publicly about late last year. They also just acquired Launchpad Toys, which sparked a lot of speculation.

But Google is not alone: Amazon have been extremely active in commissioning kids content for their Prime service and Twitter launched Vine for Kids earlier this year, for example. And of course, it’s impossible to ignore Apple, whose creation of the Kids Category has been a critical validation.

There are two broad agendas at play here. Firstly, these companies are desperate to ensure that their consumer-facing products remain relevant for the next generation of Internet consumers. Facebook’s gigantic WhatsApp acquisition is the perfect illustration of this.

Secondly, they are all eyeing up the enormous kids ads market, which has been largely held captive by the TV companies. It’s worth diving into that a little deeper.

The big prize? Advertising

Despite declining TV views – to illustrate: viewing figures for Nickelodeon are down 20% year-on-year – and massively increasing digital growth, the proportion of ad spend across digital platforms in the kids space remains bizarrely small (approximately $700 million in the US and UK).

The chart below highlights the imbalance compared with every other audience vertical:

Because of the lack of VC-funded companies in the sector (especially adtech), there has been a limited pull-factor at work for those digital budgets. Although TV remains a powerful factor in the kids market, clearly this imbalance is going to change fast.

Already kids brands are doubling and tripling their digital ad spend for 2015 and it seems highly likely that kids digital ad market will be a $2 billion space inside two years driven by the availability of kid-safe platforms from a new generation of startups as well as the increasing activity led by Silicon Valley.

But the importance of this is beyond the ad companies. A buoyant ad market in any sector is a huge catalyst for the emergence of new companies and unlocking the digital kids ad market will fuel the general ecosystem in this space.

Who are the kidtech startups to watch in Europe?

The lack of historic investment make the interesting startups in this sector relatively easy to spot.

Unsurprisingly, many have grown by tapping into the burgeoning angel sector across Europe. Don’t be surprised if several of these raise large venture rounds or get acquired in the near future.

It is baffling to me how smart and capable people can honestly try to make money with something as inherently worthless as bombarding kids with ads!

Especially if you develop tech for kids you have a unique chance to make this world a better place. You can shape tomorrows generation with amazing tools that bring education at an Ivy League level to every last place on the planet and to every last kid in the world. We can eradicate poverty, teach democracy, create world peace. The sky is literally the limit.

And here you are thinking about “monetizing” kids , creating for them the same rat race you are stuck in, stoking their desire for things they don’t need at an early age!

You only have one life – make use of it!

Max Stern

I assume providing free access to the masterworks in the world’s great art museums isn’t “inherently worthless.” And providing free books, science tools, music education, publishing platforms, and safe communication tools for kids — are those worthless? Here are some uncomfortable truths about digital media, friend orthorim:

-Overwhelmingly, parents have indicated that they love having all of these free world-expanding resources for their kids just a button tap away

-Overwhelmingly, parents have indicated that they’re not willing to pay for them, and the few that are, won’t pay more than 99p.

So I ask you, which of the following would you prefer?

A. Digital media for kids is restricted to the thin offerings that can be created entirely with public funds;

B. Creators of apps for kids charge customers the actual costs of production, and conversely, the scope of production is limited to what parents are willing to pay;

or

C. Responsible, ethical means to support these products through advertising are employed, with functional primacy given to protecting kids’ privacy and parents’ curation.

I’m truly interested in how you propose to fund innovation in tech for kids and bring about the utopian vision you’ve described.

Wendy Kiana Kelly

Also, from what I understand, it looks like the idea is that there is simply a disproportionate amount of ad spend for kids in TV & that the $$ should be more equally dispersed between digital & TV. I’m not a huge fan of ads for kids, but I do see that this is simply a shift in spending, not really a discussion about whether ad spending is worthwhile for kids.